Can Coach Inc. Continue Its Positive Surprise Streak In The Third Quarter?

Coach (NYSE:COH) is set to release its third quarter results on May 2, 2017, wherein a decline in revenue is expected, versus the third quarter in 2016, with an EPS of 44 cents, in line with the year-ago period. However, what is more important is whether the company can continue its positive earnings surprise streak in the quarter; Coach has surpassed consensus estimates in the past 12 consecutive quarters.

Given the strengthening of the dollar, the management had revised its revenue guidance for the full year while declaring the second quarter results, driven down solely by currency. While earlier the revenue was expected to increase at low-to-mid single digits, including an expected currency benefit of 100 to 150 basis points, the company now expects an increase of low single digits, with a negative foreign currency impact of 50 basis points. This would imply that the currency will pressure the top line by over 100 basis points in the second half of the financial year. This factor may result in the third quarter nominal revenue to fall, together with the calendar shift, which has pushed Easter into the fourth quarter, as compared to the third quarter in the previous year. Furthermore, the strategic initiatives undertaken by the company in wholesale, in terms of the reduced promotions and store closures, will also have a negative impact on the revenue. Below we’ll highlight certain other factors that may play a part in the performance of the company.

Brand Transformation And Elevation

Coach has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed Coach’s strategy of selling luxury products at affordable prices. The company hired a new designer, Stuart Vevers, who introduced higher end products, and undertook to remodel the stores. The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.

Coach is also continuing to establish its modern luxury concept globally, renovating and opening 46 locations in the second quarter, including four in the directly operated North American business, taking the total up to 540 globally. This is in line with the retailer’s target to end the year with over 700 stores in the new format, representing a vast majority of the traffic the company receives. This will also be a boost to the earnings, as the comps in such stores exceed those in the balance of the fleet. All these steps undertaken, together with the department store pullback, explained below, have helped to drive brand elevation. This is reflected in the penetration of the above-$400 price bracket products, which increased to 50% of the handbag sales, a massive rise from the 30% seen last year.

Department Store Pullback

Coach’s decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, has also been a positive step, as the heavy discounting in this channel has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. The heavy discounts offered in this channel makes it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. While this strategic decision negatively impacted sales by 100 basis points in the second quarter of 2017 (ended December), and may further impact the third quarter earnings, it is expected to have significant long term gains.

Coach has its roots in the wholesale business, as it began as a wholesaler to department stores in the 1940s. However, the company no longer receives a bulk of its sales from this channel. According to Bloomberg, the company currently gets less than 5% of its total business from North American department stores, despite having a presence in a thousand locations in the country. In as early as 2004, the company attained over 45% of its sales from wholesale channels. In recent years, the company has instead concentrated on building out its own retail locations or selling the merchandise through its e-commerce websites.

See our complete analysis for Coach here

Have more questions on Coach? See the links below:

• Why Has Coach Inc.’s Stock Price Increased Over 15% Since The Beginning Of The Year?
• Could Coach Inc. Be A Takeover Target?
• Why Does A Deal Between Kate Spade And Coach Inc. Make Sense?

See our complete analysis for Coach